Turning Lemons into Lemonade

While the growing softness in the economy and real estate markets impacts us all, most institutions are well-capitalized and positioned for the future. The essential question is: Do your members know this? How do we turn lemons into lemonade?


The crisis of confidence continues.  The Dow has dropped to the 8,000 range, territory that hasn’t been seen since 2003.  WaMu failed and was acquired by Chase.  Wachovia has been gobbled up by Wells.  Consumers and businesses are wondering, “Who and what is next?”

Lost in all the media hand-wringing about the state of the financial services industry is the fact that the majority of financial institutions are fundamentally sound.  Most did not engage in sub-prime lending, and while the growing softness in the economy and real estate markets impacts us all, most institutions are well-capitalized and positioned for the future.  The essential question is:  Do your members know this?

Asked a different way, how do we turn lemons into lemonade?  There is an outstanding opportunity for well-positioned credit unions to take advantage of the stress that we are seeing in the financial services arena and grow their base of members and balances.  In order to do so, keep in mind three things:

First, there is a real flight to safety on the part of consumers.  This flight to safety has two components.  The first is the flight from the equities market.  A 30%-plus decline in the Dow in one year will do that.  The second component is the flight from financial institutions that are perceived to have safety and soundness issues. Both of these actually present opportunities for well-positioned credit unions.  The key is to take this short-term flow of funds into your organization and turn it into long-term members.  How can you do this?

Reassure your own member base, as well as the market, of your own soundness.  Let your top 1,000 deposit members know via a personal letter from the CEO that you did not engage in sub-prime lending and that your capital position is strong.  Educate your members on the increase in deposit insurance and show them how they can effectively increase those limits if need be.  Let the marketplace know that you are still lending.  Nothing will create reassurance in the market better than the message that you are doing business as usual. 

The important thing to keep in mind is that while we all read the same media reports of the imminent demise of our financial system, the reality is that most consumers do not feel the same way about their own financial situation.  This is evidenced by our most recent consumer study, which illustrates the disconnect between consumers’ sense of the economy’s weakness and their belief in their own financial prospects (see chart 1).  While they feel the economy will be in turmoil over the next six months, the majority also feel that their own financial situation will be stable.  And they want a financial partner they perceive as stable and willing to support them.

Second, identify those new or existing members who have brought new deposits to you and develop a strategy to turn this short-term flight to safety into a long-term relationship.  In this environment, a new member who has recently deposited $25,000 or more into your money market account is in great likelihood seeking to diversify his risk.  How do you hold on to these dollars for the long term?  The key is the checking account and your investment services.    

Any new member with a substantial MMA balance who lives within three miles of any of your locations should be targeted with a checking account.  But don’t offer just your standard checking account.   Offer a checking account (e.g., Investors Checking) with innovative features that will appeal to those with high MMA balances.  Those innovative features might include ATM surcharge waivers or debit rewards.  Even consider offering a better rate on the MMA if the account-holder also uses your checking account.

This checking strategy can even be applied for those beyond the three-mile footprint of your branch if the demographics are right.  For example, high-income, younger households are much more likely to access their checking accounts electronically. Identify those new MMA households that are under the age of 35 and have income of over $75,000 and target them with this checking strategy regardless of where they live.

But what about those new MMA relationships that don’t fit this younger, high-income profile and live beyond the three-mile footprint of your branches?  Keep in mind that most older individuals have a preference for CDs over variable rate MMAs.  But, they are unwilling to lock their funds into long-term CDs because they believe rates will rise, and they are unwilling to incur the early withdrawal penalty that would be imposed if they pulled the funds out early.  How to overcome this resistance?  Consider a long-term CD (for example, five years) where the early withdrawal penalties are waived as long as the withdrawn funds are invested into your institution’s investment accounts.  Educate these new members that stock market performance tends to trend upward six months prior to the beginning of an actual recovery, and that this CD/investment service combination allows them the guarantee of a fixed return coupled with the flexibility to move these funds back in to the market when the time is right.

Third, remember that consumers and small businesses that are fundamentally sound may have unusual short-term funding needs in the current environment.  This is especially true of small business owners who have found their lines reduced or frozen by the larger banks that are suffering from the liquidity crunch.  Now is the opportunity to create and strengthen relationships with small businesses (often masquerading as high-end consumer accounts) by offering them the credit to continue to operate their businesses.  Let the market know that you are continuing to lend.  Billboards and branch banners are not overkill.  Your loyalty to them in this environment is likely to be amply rewarded in the long term.

*Raddon Financial Group is a business unit of Open Solutions Inc.® Learn more at http://www.theraddonreport.com.




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